Tax

If you are thinking about offering your employees the new individual coverage health reimbursement arrangement (ICHRA), take a moment to read the insights below.

Class size rule. You face the class size rule only if you offer a traditional group health plan to one class of employees and an ICHRA to another.

Minimum class size example. You cover four full-time employees with group health coverage and offer an ICHRA of $400 a month to your 12 part-time employees. Eight of the part-time employees accept. You satisfy the “same terms” rule and meet the class size requirement.

No minimum class size example. You face no minimum class size requirements when you don’t offer a traditional group health plan. Say you have seven employees. You can offer a $16,000 ICHRA to your two salaried employees and a $5,000 ICHRA to your five hourly employees.

Carryover rules. You can establish your ICHRA so employees can carry over unused amounts to next year.

Section 125 Plan strategy. You can use a cafeteria plan (a Section 125 plan) to let those employees who purchase individual health insurance coverage outside of a public exchange pay the uncovered part of the premium, which allows you and your employees to save on taxes.

Avoiding the $100-a-day-per-employee penalty. The ICHRA avoids the Affordable Care Act’s $100-a-day-per-employee penalty for reimbursing individually purchased health insurance.

Not subject to affordability rules. Businesses with fewer than 50 employees are not subject to affordability rules under Section 4980H, providing additional flexibility.

Qualifying insurance. Insurance that qualifies for the ICHRA includes individual coverage purchased through an exchange or on the open market, and Medicare.

The ICHRA has advantages for the small business. If you want to discuss the ICHRA, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 9, 2023

The distinction between repair expenses and improvement costs can impact your tax benefits.

The tax law categorizes repair and improvement costs differently. Repair expenses are generally more beneficial for tax purposes, providing greater after-tax cash value than the depreciation deductions you would get from improvements or additions.

One key reason for this is recapture taxes. When you depreciate a building and then sell it at a profit, a percentage (up to 25 percent) of the straight-line depreciation you claimed on the building is taxed as “unrecaptured Section 1250 gain.” This effectively transforms what you might have considered deductions into something resembling a profit-sharing loan from the IRS, which is repayable upon sale.

Further, depreciation deductions come in small parts over long durations—27.5 years for residential rental properties and 39 years for commercial properties. In comparison, repair expenses can provide immediate tax benefits, depending on how the passive loss rules affect you.

Example. If you spent $30,000 on repairs to your business building and are in the 28 percent tax bracket, you could save $8,400. On the other hand, if you classified the same $30,000 as a capital expenditure (improvement), you would deduct depreciation and save approximately $215 a year.

And this $215 per year is not really $215 a year because it does not consider

• the time value of money, or
• the devastating effect of recapture taxes.

If you would like my help distinguishing between repairs and improvements, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 8, 2023

If you own your own business and operate as a proprietorship or partnership (wherein your spouse is not a partner), one of the smartest tax moves you can make is hiring your spouse to work as your employee.

But the tax savings may be a mirage if you don’t pay your spouse the right way. And the arrangement is subject to attack by the IRS if your spouse is not a bona fide employee.

Here are four things you should know before you hire your spouse that will maximize your savings and minimize the audit risk.

1. Pay benefits, not wages. The way to save on taxes is to pay your spouse using tax-free employee benefits, not taxable wages. Benefits such as health insurance are fully deductible by you as a business expense, but not taxable income for your spouse.

Also, if you pay your spouse only with tax-free fringe benefits, you need not pay payroll taxes, file employment tax returns, or file a W-2 for your spouse.

2. Establish a medical reimbursement arrangement. The most valuable fringe benefit you can provide your spouse-employee is reimbursement for health insurance and uninsured medical expenses. You can accomplish this through a 105-HRA plan if your spouse is your sole employee, or an Individual Coverage Health Reimbursement Arrangement (ICHRA) if you have multiple employees.

3. Provide benefits in addition to health coverage.There are many other tax-free fringe benefits you can provide your spouse in addition to health insurance, including education related to your business, up to $50,000 of life insurance, and de minimis fringes such as gifts.

4. Treat your spouse as a bona fide employee. For your arrangement to withstand IRS scrutiny, you must be able to prove that your spouse is your bona fide employee. You’ll have no problem if:

• you are the sole owner of your business,
• your spouse does real work under your direction and control and keeps a timesheet,
• you regularly pay your spouse’s medical and other reimbursable expenses from your separate business checking account, and
• your spouse’s compensation is reasonable for the work performed.

If you have any further questions or need my assistance, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 9, 2023